Question

Molly's Auto Detailers maintains its records on the cash basis. During 2018, Molly's collected $73,400 from customers and paid $20,900 in expenses. Depreciation expense of $3,300 would have been recorded on the accrual basis. Over the course of the year, accounts receivable increased $5,000, prepaid expenses decreased $2,300, and accrued liabilities decreased $1,600. Molly's accrual basis net income was:

Answer 1

Solution

Molly’s Auto Detailers

Determination of accrual basis net income:

Sales Revenue
Increase in accounts receivable	$5,000
collections from customers	$73,400	$78,400
Expenses -
cash expenses	($20,900)
Depreciation	($3,300)
Decrease in prepaid expenses	($2,300)
Decrease in accrued liabilities	$1,600	($24,900)
Net Income		$53,500

Notes:

1. Depreciation is a non-cash expense for determination of net income under accrual basis.
2. Increase in accounts receivable indicates increase in sales revenue for the current year.
3. Decrease in prepaid expenses indicates recognition of expense in current period under accrual system, and hence the net income is reduced.
4. Decrease in accrued liabilities would increase net income under accrual basis system.